In a report last week, Fitch Ratings detailed an alternative to increased credit enhancement levels related to predatory-lending legislation risk. If an analysis of mortgage originators and underwriters shows strengths in their compliance procedures, such as the application of quality control tools, the credit enhancement on affected deals might be reduced, the rating agency said. However, some of the increased credit enhancement is still required because no originator can be viewed as completely isolated from this risk.
On the issue of compliance, Fitch has held discussions with the major residential MBS originators and conduits as well as securities underwriters. Based on these conversations, the rating agency said that it has enhanced its annual review of originators to include a more detailed analysis of predatory lending. The enhanced review contains documentation requests from Fitch focusing on compliance issues such as the use of technology to filter loans.